This AI Stock Has Increased by 155% Over the Past Year and Its Future Looks Bright

The stock market has been experiencing significant growth over the last couple of years. The S&P 500 posted impressive back-to-back annual gains of over 25% in 2023 and 2024, a feat that has only occurred once previously since its inception, during the dot-com boom of 1997 and 1998.

Much of this growth can be attributed to the rise of artificial intelligence (AI), with popular stocks like Palantir Technologies and Nvidia leading the charge. However, another lesser-known AI stock has recently gained attention for its remarkable performance:

Upstart Holdings (UPST -4.35%) has developed an AI-driven algorithm aimed at sourcing loans for banks and financial institutions. This innovative approach provides various advantages over conventional methods for assessing creditworthiness. Over the past year, Upstart's stock has surged by 155%, but it is still 79% lower than its all-time high achieved during the tech frenzy of 2021.

This article will explore several reasons why Upstart may continue to thrive.

Faster and More Accurate Loan Approvals

For about three decades, banks have primarily relied on Fair Isaac's FICO scoring system to evaluate borrowers' creditworthiness. This traditional scoring method considers only a limited number of basic factors, such as past repayment history and current debts. In contrast, Upstart believes this approach fails to adequately address the complexities of modern borrowers.

Upstart's AI algorithm evaluates more than 2,500 different variables to provide a comprehensive assessment of an applicant's ability to repay a loan. This results in over double the number of loan approvals while maintaining a risk profile comparable to traditional methods. Additionally, borrowers benefit, on average, from interest rates that are 38% lower due to Upstart's superior risk assessment capabilities.

The breadth of variables that Upstart analyzes is expected to expand over time, which should enhance its accuracy even further. Recently, Upstart introduced a new AI model referred to as Model 19, which intelligently adapts to various delinquency states. This means that borrowers who have previously struggled but have since recovered provide beneficial training data for Upstart’s algorithms, data that was largely ignored by previous models.

Moreover, thanks to its AI capabilities, 91% of Upstart's loan approval process is completely automated, allowing for instantaneous decisions for applicants. This is a significant improvement compared to traditional methods, where human assessors could take days or weeks to analyze similar data.

While unsecured personal loans account for the majority of Upstart's business, the company is also expanding into other areas like automotive lending and home equity lines of credit (HELOC).

Accelerating Revenue Growth for Upstart

In the fourth quarter of 2024, Upstart reported $219 million in revenue, marking a staggering 56% increase compared to the same quarter last year. This growth is a notable acceleration from the 20% increase seen in the previous quarter.

The impressive performance can be attributed to advancements in Upstart's AI models, which have led to higher approval rates and a surge in loan demand across the board. In Q4, the company originated 243,495 unsecured personal loans, representing an 89% increase year-over-year. Furthermore, the number of automotive loans originated increased by 216% compared to a year ago, and HELOCs saw a 60% quarterly increase.

The fourth quarter concluded a strong year for Upstart, with total revenues reaching $636 million for 2024. While this figure still falls short of its peak in 2021, it indicates a 24% year-over-year growth after two years of declines driven by rising interest rates, which had caused a significant drop in loan demand. This decline was a crucial factor in Upstart's stock dip during 2022 and 2023.

Additionally, Upstart successfully improved its bottom line throughout 2024 thanks to robust revenue growth coupled with prudent cost management. Although the company reported a net loss of $128.5 million, this is a substantial reduction of 46% from the net loss of $240.1 million in 2023. Notably, Upstart only lost $2.7 million in Q4, suggesting that profitability could be on the horizon.

Attractive Stock Valuation of Upstart

As Upstart is not yet profitable, traditional stock valuation metrics like the price-to-earnings (P/E) ratio are not applicable. Instead, we can look at the price-to-sales (P/S) ratio, which calculates a company's market capitalization relative to its annual revenue.

Currently, Upstart's P/S ratio stands at 11.9, reflecting a 33% premium compared to its historical average of 8.9 since its IPO in 2020. However, management has projected a record $1 billion in revenue for 2025, representing a remarkable 57% increase over 2024 figures. This projection places its forward P/S ratio at 6.7.

This means that Upstart’s stock would need to appreciate by 32% during 2025 just to align with its average P/S ratio of 8.9. If the company can continue to show accelerating revenue growth on a quarterly basis throughout the year, even greater returns could be on the horizon.

Looking further into the future, Upstart has only begun to tap into its potential market. Since its inception in 2012, it has originated merely $42 billion in loans, a small fraction of the overall $3 trillion in annual loan originations across various sectors, including mortgages, car loans, personal loans, and small business loans, in the U.S.

In conclusion, the remarkable 155% increase in Upstart’s stock over the past year may only be the beginning of a significant upward trend.

Note: The author has no positions in any stocks mentioned. The author is not associated with any online publications. However, please conduct independent research before making any investment decisions.

Stocks, AI, Finance